Brazil Raises Benchmark Interest Rate to 7.75%... 150bp Hike at Once

Six Consecutive Interest Rate Hikes Since March
Inflation Pressure Intensifies, Further Increases Possible

[Image source=EPA Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] The Central Bank of Brazil raised its benchmark interest rate from 6.25% to 7.75%, a 150 basis points (1bp=0.01 percentage point) increase in one go. This marks the sixth consecutive rate hike since March, pushing Brazil's interest rate to its highest level in four years since 2017. This move is seen as a desperate measure to curb the rapidly rising inflation caused by the economic downturn due to the COVID-19 pandemic and political instability.

On the 27th (local time), the Central Bank of Brazil announced that the Monetary Policy Committee unanimously agreed to raise the benchmark interest rate by 1.5 percentage points from the previous 6.25% to 7.75%. This increase exceeded the experts' forecast of a 1 percentage point hike. Starting with a 75bp increase from 2.00% to 2.75% in March this year, the Central Bank of Brazil has implemented six consecutive rate hikes this year.

According to the Associated Press, Brazil's benchmark interest rate has reached its highest level in four years since October 2017, when it was 8.25%. The reason behind Brazil's series of aggressive rate hikes this year is attributed to the double-digit inflation rate that has sharply risen over the past 12 months.

The Central Bank of Brazil reported that the inflation rate over the past 12 months up to last month was 10.25%. This is the first time in five years and six months since February 2016, when it was 10.36%, that double-digit inflation has been recorded. Furthermore, the Central Bank's economic outlook report released at the end of last month raised the annual inflation forecast for this year significantly from 5.8% to 8.5%. With inflation management in crisis, the Central Bank of Brazil resorted to the drastic measure of raising the benchmark interest rate by 150bp at once.

Brazil is facing economic recession due to the COVID-19 pandemic along with worsening political instability, leading to assessments that the government's inflation control is not being properly implemented. According to CNN, President Jair Bolsonaro recently announced a 20% increase in welfare payments for the poor to regain his declining approval ratings, which is reported to have further intensified inflationary pressures.